The National Bureau of Statistics released Nigeria’s inflation figures for the month of December 2020, which puts headline inflation rate at 15.75%, a big leap from the 14.89% recorded in the previous month.
It is evident that Nigerians have continued to grapple with the effect of the Covid-19 induced lockdown, sustained border closure (until December 2020), insecurity, amongst others, that has plummeted the economy into recession.
Nigeria’s inflation climbed to its highest in 3 years, which is a cause for worry as analysts predicts higher inflationary pressure for the year 2021.
Wale Okurinboye, CFA, Head Investment Research, Sigma Pensions
In a chat with Wale Okurinboye, he addressed the factors that would determine the direction of Nigeria’s inflation in 2021.
“I expect lingering impact of the main shocks to 2020 inflation i.e. fuel price increments (+25-30%), electricity price hikes (55-65%), currency weakness and food price pressure to drive headline inflation towards 16-18% levels in the first half of 2021.
“However, strong base effects from 2020 will help contain upside over H2 2021. In all, I expect inflation to remain elevated over the year reflecting the shocks to key input prices.”
While commenting on actions to mitigate the current trends, he added that in order to lower inflation, Nigeria needs to address cost issues: supply chain around food (tackle insecurity issues in key crop producing areas), ensure exchange rate stability and hope no major increase in international oil prices.
He however stated that, “given the impact of Covid-19 on Nigeria’s external and fiscal accounts, this might be too much to ask.”
Victor Aluyi, Head, Portfolio Management, Commercio Partners
“I believe we are going to see the headline figures continue to spike over the next couple of months, although not as much because the December spike was quite expected as we saw pent up spending, which basically characterises that period whilst putting pressure on food inflation.”
This added to the factors we have been experiencing before now, the currency weakness, supply chain disruption amongst others.
“We could also see that the border closure has also played a significant role in exerting that upward pressure on headline inflation. However, we are likely to see the pressure ease due to the presidential directive to open up land borders in December 2020.”
“Nigeria’s inflation is likely to top 16% and probably closer to 18% in 2021. Although, the recent inflationary pressure is due to structural issues but monetary policies can also play its part in trickling down the numbers.”
Wale Olusi, Head of Research, United Capital
According to Wale Olusi, there are a number of factors that will determine inflation rate in 2021, but posits that the inflation figure is likely to top 16% or go as high as 19% if nothing is done about it.
“We at United Capital expect the headline inflation rate to peak at around 16% before pulling back, if no further policy adjustment is made.”
He, however, suggests that inflation could ease due to the reopening of the land borders as food prices are already trickling down in some regions of the country. He also mentioned that other factors such as oil prices, monetary policy and structural issues could drive the headline inflation higher if adequate measures are not put in place.
On tightening monetary stance
Wale Okurinboye opines that he expects the Apex bank to raise the MPR at some point in the year, possibly by 100 – 200 basis points. He, however, projects that Nigeria will exit recession by the second quarter of the year assuming there is no re-introduction of lockdown measures.
Okurinboye explained that, “this is an epidemic induced recession not a structural one, so as business activities return to normal on the non-oil side and as OPEC lifts output curbs on oil production, I expect Nigeria to exit recession in Q2 2021.”
In the words of Victor Aluyi, “the response of the Monetary committee has been that of an output growth, which is why we see reduction in the benchmark rate. They are trying to starve off the complete impact of the Covid-19 challenge and also reflate the economy.
“Meanwhile, I don’t see any adjustment in the coming months in terms of tightening, but it remains to be seen what the impact of the loosened rate has been, whether it has spurred growth in helping the economy recover quicker.”
Wale Olusi expects the Monetary Policy Committee (MPC) of the Apex bank to tighten its monetary policy stance at some point in the second and third quarter of the year.
He also expects the economy to rebound by about 1.7% to 2% buoyed by increased economic activity and improvement in the global oil market.
What you should know
- Nigeria’s inflation rose to 15.75% in December 2020, which is the highest rate recorded since December 2017.
- Inflation has been on a persistent upward trend since September 2019, around the time the federal government ordered the closure of land borders.
- The 2021 budget projects that Nigeria’s inflation will close at 11.95% in 2021 and a projected GDP growth of 3%.
- Nigeria’s food inflation also rose to its highest in 3 years. The last time Nigeria recorded a rise in the food index as high as 19.56% was November 2017.
The Nigeria economy has been ravaged by the effects of the Covid-19 outbreak, global oil prices, and border closure, which exerted inflationary pressure, thereby eroding the purchasing power of consumers in the country.
Meanwhile, analysts have predicted more doom in the short term but expects a positive spin as we go to the second half of the year.
The Nigerian economy is increasingly dollarized but there is a way-out
Nigeria’s overdependence on Oil has brought about high dollarization in Africa’s biggest economy.
For managers of the Nigerian economy, it was a huge sigh of relief when the National Bureau of Statistics reported that the country had surprisingly exited a recession in the 4th quarter of 2020. Contrary to most analyst expectation, the Nigerian economy grew by 0.11% in the 4th quarter of 2020.
Despite the return to growth, albeit tepid, a dark cloud of uncertainty continues to hover over the minds of millions of Nigerians as the broader economy remains in a fragile state. A key factor that remains a bellwether for the economy is the exchange rate, which is always perfectly correlated with the price of oil and the resultant dollar related export earnings.
Data has repeatedly shown that the country of over 200 million people is affected by the volatility of crude oil prices in the international market, particularly in the exchange rate value of the naira. Without oil, the Nigerian economy in its current state will collapse.
Data from Nairalytics, a data-sharing portal, reveals that the oil sector provides for 85% of Nigeria’s export earnings and 55% of its government revenues, making the nation highly dependent on the dollar for its survival. It appears a lot of financially savvy Nigerians now this already and are increasing their dollar positions.
According to Silas Ozoya, Founder/CEO of SUBA Capital LLC, in an exclusive interview with Nairametrics, a growing number of Nigerians are getting more attached to the US dollar due to high inflation and low purchasing power of the naira.
“Many Nigerians are beginning to dollarize their spending, investment and asset holdings to hedge against the ever-increasing inflation rate and our strong economic romance with recession,” Ozoya said.
Nigeria, Africa’s biggest crude oil producer, has been heavily impacted by the plunge in crude oil prices following the outbreak of the COVID-19 pandemic, with the nation’s authorities adjusting the naira twice in the year 2020 to deal with the pressure.
Besides the drop in foreign exchange revenues from crude oil export, diaspora remittances, which made up about 5% of Nigeria’s GDP in the year 2019, also experienced a significant decline in 2020, again due to the impact of the pandemic and the economic challenges faced by many nations across the globe.
Uwa Osadiaye, a financial analyst in a leading merchant bank, in a note to Nairametrics, revealed that the Nigerian apex bank had made great efforts to reduce the country’s high dependence on the dollar. He advised the nation to increase its Agricultural production.
“The central bank has tried to do this with little success but I believe that beyond administrative measures, the key could lie in increased domestic production of things we consume that aren’t commoditized internationally for a start, such as food crops,” Osadiaye said.
Temitope Busari, CFA, in a telephone interview with Nairametrics, said that it was time for Nigeria as a country to diversify.
“One outcome of the diversification of the Nigerian economy, and perhaps the most critical one at this time, is the potential to diversify our foreign exchange earnings as a sovereign state. It will reduce overdependence on crude oil, maximize opportunities in erstwhile neglected sectors and project the country as the destination for top-class value creation in other areas outside being an oil-producing state,” Busari stated.
The financial analyst also spoke on the need for Africa’s leading oil producer to invest more in intellectual property and encourage Nigeria’s talent in the diaspora, saying:
“We have produced some of the most brilliant minds in the world evidenced by the ground-breaking successes recorded by Nigerians in diaspora (Medical professionals, Software engineers, resilient small business owners to mention a few), and we must begin to drive policies to retain that talent in-country and make the world pay premium dollar for it.”
Adetayo Teluwo, a scholar at Warwick Business School, said that the narrative seems to be changing as Nigerians are now beginning to embrace homemade goods.
“The Fashion & Style scene continues to boom. From side hustles to globally-competitive websites with options to accept payments from customers all over the globe,” Teluwo said.
Economic experts believe that the way to solve this growing menace is for Nigeria to promote free markets and support large scale exports from the Agricultural, Mining, and Technology sectors. The country should tap into its raw diamond which is “intellectual services” to develop a knowledge economy.
Nigeria can draw lessons from India, which has performed remarkably well in creating an outsourcing and knowledge-based economy valued at over 150 billion dollars per annum. This has put India on the technology map, as a destination of low-cost but high-quality technical services, helping the densely populated nation to generate sufficient economic ripple effect to drive job and wealth creation.
Three things Nigerians can learn from Warren Buffet’s latest letter
Three things we learned from Berkshire Hathaway’s (Warren Buffet’s) 2020 letter to shareholders.
Three things we learned from Berkshire Hathaway’s (Warren Buffet’s) 2020 letter to shareholders.
Warren Buffet (Sage of Omaha) recently released his annual letter to Berkshire Hathaway’s shareholders providing a recap of 2020 performance, as well as, giving his general perspective of his company’s journey.
Investors all around the globe fall over themselves to pay attention to what Mr. Buffet says, as well as how his portfolio of companies are performing. Just to learn as much as possible from one of the world’s most successful investors to date.
We at Nairametrics are no different and in this article, we will share some key business takeaways from the 2020 letter.
1. Compounding still makes you rich
Just in case some investors momentarily forget about the power of compounding and consistency in investments, the very first page of Mr. Buffet’s letter serves up a timely reminder.
Specifically, since 1965 to 2020, the market value of Berkshire Hathaway’s stock has grown at a compounded rate of 20%. This is remarkable given that very few companies last that long (55 years) let alone provide such returns in US dollars over such a period of time. Even the S&P 500 with dividends included compounded at 10% (which is no small feat in of itself).
This lesson here is that for Retail investors, SMEs, startups, the power of compounding doesn’t need to be continually reminded, it needs to be a primary focus as you seek to deploy capital.
For context, in 1965 our dear country Nigeria had approximately $240million in external reserves.
- If only 1% (i.e. $2.4million) had been invested in the S&P500 index and kept in a fund, the value of that fund today will be $56.3billion.
- Alternatively, if only 0.05% ($1.2million) had been invested in Berkshire Hathaway stock and kept in a fund, the value of that fund today will be worth $67.45billion.
2. Always focus on your CORE objectives and Key results
In 2020, Berkshire Hathaway earned USD$45billion of which $21.9b was operating income, $4.9b was unrealized gain, $26.7b was unrealized gain partially offset by $11b loss write-down.
Despite the huge unrealized gain of $26.7b, Mr. Buffet in his typical style was dismissive of unrealized gains but rather was quick to point out that his core objectives of growing operating income and acquiring good companies were not met in 2020!!!.
- “Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.”
Furthermore, Mr. Buffet points out that Berkshire Hathaway’s earnings do NOT factor any portion of the operating earnings of companies which they have stakes in, such that only the dividends due to Berkshire are included in the results.
In other words, he is keen to avoid clouding actual performance of his CORE investment vehicle by avoiding accounting gimmicks which gross-up earnings.
For Nigerian startups, SMEs, retail investors, the lesson here is that a laser-focused approach to tracking CORE business earnings helps provide business owners with clarity about actual business performance. This persistent clarity keeps owners grounded on what are the key areas of focus for improved business performance whilst avoiding reporting superficial income.
3. Avoid business complexities AND always choose the most profitable business path which offers the least resistance.
We previously mentioned, Mr. Buffet’s preference to tracking income from CORE businesses. In his letter to shareholders, he goes further to discuss his apathy to the traditional Conglomerate.
Specifically, most businesses that are acquired are seldom leaders in their sector and often are underperforming hence the need to be acquired. Consequently “Conglomerates” who focus on fully acquiring other businesses will likely end up with a portfolio of “Sub-optimal” businesses.
Turning around the fortunes of these “acquired’ businesses will require management time and effort whilst distracting from CORE operations and creating business complexities.
Mr. Buffet notes that going forward Berkshire Hathaway’s approach will seek to avoid this option of undue business complexity and focus on path of least resistance to profitability. This will be achieved by continuing to find very good businesses and taking a stake in these well run businesses.
- “It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.
- “For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.
- “If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”
The lesson here for Nigerian startups, SMEs, retail investors is that rather than always wanting to go alone into new ventures, sometimes you need to seek competent partners to collaborate and execute ventures with. (i.e., successful business isn’t always about who struggled the most).
Finally, (Yeah, I know I said three things, but this is also an important takeaway), one additional point is that consistency pays. We previously stated that Berkshire Hathaway stock has returned 2,810,526% between 1965 to 2020. One way that Mr. Buffet has accomplished this is by being very consistent in his portfolio. Consistency can be seen in the duration of holdings, as well as the general mix of the sectors of interest.
With regards to duration, the three most valuable assets in his portfolio have been held for at least 15years plus.
|GEICO||1951 to date||Financial Services – Insurance|
|BHE (Berkshire Hathaway Energy)||1999 to date||Utilities – Energy|
|BNSF (Burlington Northern Santa Fe, LLC)||2006 to date||Utilities – Freight/Transport|
Even if you then look at the top 15 investments in Berkshire’s portfolio, you notice it is comprised largely of Financial Services, Utilities stocks and Large Tech firms.
The lesson here for Nigerian startups, SMEs, retail investors is that if you find something that you are good at, keep doing it and producing consistent results, stay within your area of competence and aim to maximize value.
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